ECON305: Public Finance

Unit 4: Rent Seeking and Other Government FailuresIn this unit, we will discuss the implications of several Public Choice
models that relate to raising and spending of government revenue. We
will begin by “rent-seeking.”Rent seeking refers to lobbying the
government for policies that give interest groups above-market profits.
Subsidies and taxes are potential tools for rent-seeking. If Company A
can get the government to tax a competitor (Company B) more heavily or
subsidize Company A directly, it can earn “rents” by being able to
operate at a lower internal cost. We will revisit the question of
government failure as a result of rent-seeking behavior.

Next, we will consider how arguments in favor of rent-seeking are
framed “in the public interest.” Bruce Yandle's theory of “Bootleggers
and Baptists” tells the tale of how publicly interested persons end up
supporting their opponents. “X-inefficiencies” are those that arise
from subsidized industries that need greater and greater subsidies to
survive, and thus spend more money to secure those subsidies. The
term “Iron Triangles” refers to relationships of mutual interest that
form between special interest groups, bureaucrats, and politicians and
effectively block democratic efforts to reduce or remove special
subsidies and taxes. We will then consider several efforts that have
been made to get around these problems, including The Grace Commission,
the Graham-Rudman Act, and the Base Realignment and Closure Commission.

Terms of Use: The article above is licensed under a Creative
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License. It is
attributed to contributor's to MBA651 Fall 2007’s wikispaces page,
as a portion of the original post titled “Public Goods, Rent
Seeking,” and the original version can be found
here.

Instructions: Please read both texts in their entirety, paying
particular attention in the NMcBeth reading to how interest groups
are able to overcome the free-rider dilemma.
Terms of Use: The article by NMcBeth is licensed under a [Creative
Commons Attribution-NoDerivs 2.5 Generic
License](http://creativecommons.org/licenses/by-nd/2.5/). The
original version of the NMcBeth article can be found
[here](http://metaphoric.squarespace.com/metaphoric/2006/10/25/synopsis-of-interest-group-thoery.html).
Terms of Use: The Wikipedia article above is released under a
[Creative Commons Attribution-Share-Alike License
3.0](http://creativecommons.org/licenses/by-sa/3.0/). You can find
the original Wikipedia version of this
article [here](http://en.wikipedia.org/wiki/Iron_triangle_%28US_politics%29).

Instructions: Please read all of these articles in their entirety,
identifying what the “rent” is in each case, and what strategies the
“rent seekers” are taking to gain this benefit. Do you think these
represent a justified use of public resources?

Terms of Use: The article from People's World is is licensed under
a [Creative Commons Attribution-Noncommercial-No Derivative Works
3.0 United States
License](http://creativecommons.org/licenses/by-nc-nd/3.0/us/). The
original version of the People's World article can be found
[here](http://www.peoplesworld.org/military-bases-are-no-solution-for-jobs-economy/).

Instructions: Please open the link above and complete the reading
about The Grace Commission in its entirety.

Terms of Use: The article above is released under a [Creative
Commons Attribution-Share-Alike License
3.0](http://creativecommons.org/licenses/by-sa/3.0/). You can find
the original Wikipedia version of this article
[here](http://en.wikipedia.org/wiki/The_Grace_Commission).

Terms of Use: The article above is released under a [Creative
Commons Attribution-Share-Alike License
3.0](http://creativecommons.org/licenses/by-sa/3.0/). You can find
the original Wikipedia version of this article
[here](http://en.wikipedia.org/wiki/Gramm%E2%80%93Rudman%E2%80%93Hollings_Balanced_Budget_Act).

Terms of Use: The article above is released under a [Creative
Commons Attribution-Share-Alike License
3.0](http://creativecommons.org/licenses/by-sa/3.0/). You can find
the original Wikipedia version of this article
[here](http://en.wikipedia.org/wiki/Base_Realignment_and_Closure).

Instructions: Please read the text in its entirety. To access the
reading, follow the above link and click on the link to
“Decentralization and Quality of Government:”

Note on the Text: This reading was presented at Conference on
Fiscal Decentralization sponsored by the IMF in November 2000. If
you have further interest in the topic, feel free to read some of
the other readings contained in the site.

Terms of Use: Please respect the copyright and terms of use
displayed on the web pages above.

IInstructions: Please click on the link above to access the
document. Complete this reading in its entirety (7 pages).

Terms of Use: The article above is released under a [Creative
Commons Attribution-Share-Alike License
3.0](http://creativecommons.org/licenses/by-sa/3.0/). You can find
the original Wikipedia version of this article
[here](http://en.wikipedia.org/wiki/Public%E2%80%93private_partnership).

Instructions: Please watch through the whole video (11:43). While
watching, consider whether the solution of charter schools is a good
one. Might this model be used in other contexts with other state
services?